The Case Against a “Grand Bargain”

With politicians (and investors) finally facing up to the reality of the impending fiscal cliff—the roughly seven hundred billion dollars in tax increases and spending cuts that are set to start going into effect on January 1st—the talk in Washington is all about the possibility of Democrats and Republicans finding a way to reach a “grand bargain.” The hope is that if the two parties can agree on a plan to cut the federal deficit in the long run, then we can avoid the plunge into austerity that going over the cliff would represent—a plunge that a Congressional Budget Office report issued on Thursday estimated would send the economy back into recession and unemployment up above nine per cent. And so President Obama today said he’d begin talking with congressional leaders next week to make a deal, while Speaker of the House John Boehner said that he was “hopeful” that the two parties would soon begin working to “forge an agreement.”

That Congress and the White House are thinking in grand-bargain terms is not surprising—the spending-cuts part of the fiscal cliff (also known as sequestration) was designed, as I wrote about a few weeks ago, to force Washington to deal with long-term deficit issues. As part of the 2011 deal over the debt ceiling, Congress in effect took itself hostage—the sequestration cuts, which will total two hundred and fifty billion dollars in 2013, were designed to be so onerous and ham-fisted that politicians would feel compelled to reach an agreement to avert them. And while the expiration of the Bush tax cuts—the effect of which would be to raise taxes on Americans by about four hundred and fifty billion dollars next year—weren’t part of sequestration, they’re having the same effect. Since few politicians want to raise taxes on Americans by half a trillion dollars, particularly with the economy still pretty weak, the pressure to make a deal should be intense.

Yet for all the talk about how a grand bargain is in the works, it’s far from obvious that anyone, even the small bipartisan group of senators that’s supposedly working to come up with a plan, would be able to craft a long-term budget agreement that could pass a conservative-dominated House of Representatives and a Democratic Senate, much less do so in a matter of only weeks. The most obvious, and seemingly unbridgeable, chasm is between President Obama’s insistence that any agreement will have to include higher tax rates for the wealthiest Americans and Speaker Boehner’s insistence that raising rates on anyone is a non-starter. But there are similarly deep ideological divides over Social Security and Medicaid, and, to a lesser extent, over defense spending. It’s not that compromise on these issues is impossible. It’s just that it’s unlikely that Congress will be able to do in six weeks what it hasn’t been able to do in many years.

That’s not a bad thing, though. If Congress and the President were to come up with a grand bargain in such a short time, there’s a good chance that it would be largely a product of the inside-the-Beltway biases of deficit hawks (who tend to dominate the “serious” discussions of budget policy), rather than the long-term interests of the country. And at a time when long-term interest rates are at historic lows, with the U.S. able to borrow money for ten years at less than one per cent, we simply don’t need to rush to come up with a massive debt-reduction plan. Yes, in the long run we need to deal with the debt (which, above all, means dealing with the rising cost of health care). But there’s no reason to let the fiscal cliff force us into policies that Americans don’t actually want.

That doesn’t mean, though, that we should take a header off the cliff, as some pundits have suggested. What Washington should do instead is that thing that everyone hates: kick the can down the road. The sequestration spending cuts should be repealed—no one is in favor of these cuts as a package, and putting them in place would have a direct and immediate negative impact on jobs and economic growth. If Congress wants to pass smarter, better-designed spending cuts, it can do so in the new year, when it’ll get plenty of credit for being fiscally responsible. The payroll tax cut, which puts money directly in the pockets of the Americans who are most likely to spend it, should be extended. As for the Bush-era tax cuts, Republicans may well remain intransigent about refusing to raise taxes on the wealthy. But, as many have pointed out, they don’t have all that much leverage. The Democrats can just let the tax cuts expire at the end of the year and then offer up a retroactive tax cut for ninety-eight per cent of Americans in January. Perhaps Republicans would be willing to vote against that, but it doesn’t seem likely.

Sometimes it makes sense to take yourself hostage in order to compel yourself to do something difficult. But that doesn’t mean that if you don’t actually do the difficult thing, it makes sense to shoot yourself in the head. Nor does it mean that hastily-arrived-at solutions, even ones that are labelled “grand bargain,” are necessarily preferable to the status quo. America may have a long-term debt problem. Throwing the economy back into recession isn’t the way to solve it.

Photograph by Allison Shelley/Getty.

James Surowiecki is the author of “The Wisdom of Crowds” and writes about economics, business, and finance for the magazine.